We initiate coverage on INTEGRA with an OUTPERFORM call at a target price of RM2.50/DCF share. We believe the company is undervalued given it trades at 12.6x forward CY14 PER which is at 25% discount to peer average of 18.0x. On the back of expected strong growth in throughput for LBT in the next three years, we expect its net profit to grow at 3-year CAGR of 22.3%. We like this stock for its (i) superior net margins achieved that ranges from 46%-60% in the period of FY08-FY12 (ii) solid balance sheet with net cash of RM 124.1m backed by strong cash generative business, and (iii) room for upside for dividend from its current payout of 30%.

Lumut Port operator. INTEGRA Bhd (INTEGRA) is the operator of Lumut Maritime Terminal (LMT) and Lekir Bulk Terminal (LBT), (50% minus one share) with 69% of the group’s total throughput coming from LBT. LBT, which INTEGRA owns 50% minus one share, mainly caters for the coal demand by Tenaga Nasional Bhd (“TENAGA”, OP; TP: RM10.45) in its Janamanjung Power Plant which is located in the reclaimed Lekir Island. In FY12, the throughput for LBT was 7m MT. The 80%-owned LMT, the other hand, mainly handles bulk cargoes consisting of dry bulk, break bulk and liquid bulk. In FY12, 3.1m MT of cargoes was handled in LMT.

Defensive earnings with high margins. We believe that earnings of INTEGRA are defensive in nature given that the bulk of its revenue is derived from the Terminal Usage Agreement with TENAGA, which spans more than 20 years. On top of that, net margins for the next 3 years are also expected to be similar or higher than 40% given 1) low cost structure of the business and 2) consistent earnings expected from associate, LMT.

Net cash company with cash generative assets. As at Jun-13, the company is sitting on net cash amounting to c.RM113.6m post repayment of all the serial bonds in that year. On top of that, the company is cash flow positive with cash flow from operations of RM50.1m recorded in FY12 and this is expected to grow further in the next five years. As such, its balance sheet has more than enough strength to take on higher CAPEX for expansions of capacity in both ports operations. It can even afford to gear up to pursue more opportunities in the bulk transhipment market.

Deep natural draft depth makes tie-up with Vale and other mining giants possible. Located near the main global shipping route, LBT has one of the deepest berths in the region with natural draft of 20m, which allows it to handle larger vessels with maximum capacity of 180,000 DWT. This puts INTEGRA in a favourable position to tie-up with Vale or other mining giants for transhipment of their bulk cargoes, which could be the potential source of long term throughput growth and broaden client base from currently, which largely depend on TENAGA.

Initiating with OUTPERFORM at RM2.50/DCF share. We arrived at a target price of RM2.50 using DCF valuation based on WACC of 11.08% (risk free rate: 4.0%, expected return on market: 9.9%). On both forward PER and PBV basis, the company is trading at a huge discount to its peers (INTEGRA CY14 PER & PBV: 12.6x & 0.9x vs. Peer average CY14 PER & PBV:18.0x & 2.2x). In addition, we also believe that there is room for growth in dividend from its current payout of 30% given its strong cash flow generating ability. A 50% payout would bring the dividend yield to a decent 4%. 

Source: Kenanga